Compliance March 25, 2020

Tax Filing Relief Adds Time to Contribute to Benefit Plans

Individuals have more time to contribute to IRAs and HSAs, and employers have more time to contribute to their retirement plans.

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In Notice 2020-18, the Treasury Department and the IRS announced special federal income tax return filing and payment relief in response to the ongoing coronavirus (COVID-19) emergency.

In a Q&A, the IRS provides additional guidance regarding the relief, including about individual retirement accounts (IRAs) and workplace-based retirement plans, as well as health savings accounts (HSAs) and Archer medical savings accounts (MSAs). For example, the due date for filing federal income tax returns was extended to July 15, which means the deadline for making contributions to an IRA for 2019 is also extended to July 15.

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Contributions may be made to an HSA or Archer MSA for a particular year at any time during the year or by the due date for filing a tax return for that year. Because the due date for filing federal income tax returns is now July 15, individuals may make contributions to their HSA or Archer MSA for 2019 at any time up to July 15. In addition, the due date for paying the 10% penalty on early withdrawals from IRA and retirement plans has been extended.

For a participant who contributed excess deferrals to his retirement plan in 2019, those excess deferrals and earnings on them must still be paid to the participant by April 15.

For employers with a federal income tax return due date of April 15, the relief not only extends the filing due date to July 15, but it also extends the grace period for the employer to make contributions to its workplace-based retirement plan that are treated as made on account of 2019 to July 15.

Compliance March 25, 2020

Retirement Plan Providers Preparing for Spikes in Loans and Hardships

As the retirement industry awaits details of a coronavirus stimulus relief bill, a spike in participant loans and hardship withdrawals is anticipated.

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News emerged early Wednesday that Congress is making progress toward finalizing an unprecedented stimulus package designed to blunt the economic impact of the coronavirus pandemic.  

Sources say the stimulus legislation could become law as soon as Wednesday night, though the timeline could stretch into later this week. They expect a variety of retirement plan focused provisions to be included in the final package, alongside a wide range of strategies meant to support individuals, families, small businesses and Fortune 500 corporations alike.

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At this stage, given that retirement plan recordkeepers tend to prepare and publish updated information about their plan sponsor clients on a quarterly basis, it is still too soon to assess whether the economic fallout of the coronavirus pandemic is causing a spike in 401(k) plan loans or hardship withdrawals. Responding to a request from PLANSPONSOR, for example, Fidelity says it is currently putting together its analysis of how participants and plans are reacting. However, the firm anticipates a spike in both loan and hardship withdrawal activity, and in response, it has already rolled out support resources for plans and participants.

The plan sponsor hub designed by the firm aims to help plan fiduciaries manage the challenges facing their workforce and their businesses. Examples of some of the resources include guidance around benefits management, such as important details on hardship withdrawals and loans; guidance about how to manage benefits for remote workers (including telemedicine); and other practical information for benefit managers. Fidelity’s participant hub, on the other hand, is designed to provide “practical and relevant help” to employees as they navigate through this challenging time. Both hubs will be updated regularly “to ensure that the content remains relevant and adjusts to meet the evolving questions and concerns employees face.”

Empower Retirement similarly says it is too soon to know exactly how participants are responding in terms of drawing loans or requesting hardship withdrawals. But like Fidelity, Empower fully expects the volumes of loans and hardship withdrawals will increase substantially in coming weeks and months.

At this point, Empower offers the following data based on its call center activity as of Monday at 7 a.m. EST:

  • Practically all the participants (99.4 %) who called in for information have stayed the course with their investments since the downturn started on February 24;
  • Overall, no meaningful asset volumes have yet moved out of retirement plans, though small balance withdrawals have risen slightly; and
  • Total web traffic volumes are up about 10%.

As the industry watches for a spike in hardship withdrawal activity, another factor to consider is that, several years ago, the Bipartisan Budget Act of 2018 provided that a distribution from a 401(k) or similar tax-qualified retirement plan will not fail to be treated as made on account of hardship merely because the employee did not first exhaust any available loan from the plan. In addition, the law expanded the types of contributions and earnings a plan may make available for hardship distributions, and it directed the IRS and Treasury Department to eliminate the safe harbor requirement to suspend participant contributions for six months in order for the distribution to be deemed necessary to satisfy an immediate and heavy financial need. These changes already had accelerated hardship activity. 

According to new survey data provided by LendEDU, 63% of Americans are worried about negative effects on retirement savings as a result of COVID-19, including 67% of those ages 55 and up. At the same time, 57% of Americans are worried about meeting monthly mortgage payments, including 96% of those who have recently lost their job. Those numbers are 63% and 88% for student loan payments, LendEDU reports, and 54% and 93% for credit card payments.

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